What Is A Secured Business Loan? Everything To Know About

If you want to grow and scale your business without being affected by a minor cash flow drop, secured business loans may help. It involves securing a loan against your business-owned assets. It is the easiest way to qualify for a higher amount. Lenders prefer businesses with strong credit histories and accounts to provide secured loans.

 As it is a long-term agreement, you must know everything before choosing a secured loan to finance your business needs. The blog discusses secured business loans. If you often require cash flexibility to counter any need immediately, the blog may help.

What does a secured business loan imply?

Secured loans for business are loans that require a business asset to qualify. The borrower must provide an asset as collateral that aligns with the amount he wants to borrow. For example, if you need around £2m to optimise the working capital process, provide machinery, equipment, a business car or anything that values £2m or above.

Collateral-based loans last for about 10-15 years. The interest rates on these loans may seem more affordable than unsecured ones. However, in reality, it may exceed your expectations. It is ideal to choose the loan repayment term wisely without choosing an extended term unnecessarily.

Usually, these loans have fixed repayment schedules. It implies you pay a fixed amount as a monthly instalment on the loan. However, if you want, you can choose a variable-rate business loan.

Who may qualify for collateral-based business loans?

The qualification criteria of a secured business loan is a little longer than unsecured loans. This is because the loan is a long-term agreement. A lender wishes to ensure the borrower’s affordability and carry loan repayment for a long tenure without missing. Thus, it may take a day or two to get the loan. You may get long-term loans from a direct lender if you meet the basic criteria:

  • You must have a well-operational business in the UK
  • You must share at least 6 months of an operational history
  • Should host a decent business turnover (above £30000)
  • Should have a detailed business plan covering the agendas you plan to use the loan for
  • Should have well-maintained bank statements, taxation reports and accounts
  • Provide a detailed overview of the asset to be put as collateral on the loan.

3 Reasons a secured loan is right for you

Every loan indeed has its functionality and uses. Just like other loans, secured loans share specific needs. Thus, it may prove ideal for your business requirements if:

1)   You need a high sum for a big-ticket purchase

Some business goals like- new equipment purchases, car purchases, investment in a new big project and expansion require major investment. Companies lacking sufficient capital upfront struggle to meet the needs. Moreover, minimal help from subordinates may not serve the purpose. Here, collateral-based loans help you get a whopping sum immediately for a big-ticket dream

2)  You have a healthy credit repayment history

Individual businesses applying for a secured business loan must hold a strong credit score. It is the primary parameter to qualify. A healthy credit history reveals timely payments on existing credits and debts. It reveals your potential and credibility to repay a huge sum in the long term without financial impact.

Alternatively, for seasonal businesses or self-employed, gaining a secured business loan may seem tricky. However, they may improve their chances of getting one by revealing payment potential. You can do this by providing a brief about alternative projects alongside the collateral.

3)   Wants flexibility on loan repayments

Sometimes, businesses having multiple liabilities like to have little flexibility on long-term commitments. Whether a startup, enterprise or limited liability partnership, you can repay the amount in small monthly instalments. You can do so by choosing a flexible loan tenure.

What are some limitations to using secured business loans?

Like any other financial facility, secured business loans have their limitations.  The primary thing is the collateral attached to the loan. Individual businesses failing to repay the amount by the term end risk losing assets. However, they may prevent it by rescheduling payments or having payment holidays. Non-repayment or delay in payments impacts the credit history. Here are other limitations to using it:

1.   Cumbersome qualifying criteria

No matter how tempting the loan may seem, not everyone qualifies for it.  Businesses with strong credit history, operational history, well-managed accounts, and consistent revenue are prime contestants. Thus, a rejection of a secured business loan may impact credit score.

You can prevent it by analysing and pre-qualifying with suitable loan providers. It will help you know the qualification chances without impacting your credit score.

2.   Troublesome for bad credit profiles

According to the rule of thumb, a business must host credible finances and credit history to qualify for secured business loans. Thus, businesses hosting poor credit histories struggle to get one.

However, businesses with pending debts in profile may get easy personal loans from a direct lender anytime. These are unsecured loans with less complicated qualifying criteria. If you need money fast for your business despite a poor credit history, this could be the fetch.

However, the lender may demand a personal guarantee to provide loans. It is because of poor credit history businesses may not get above £10000 for needs. They must provide a guarantor as a security on the payments.

3. Possibility to pay a higher sum upfront

Generally, businesses applying for secured business loans must pay valuation fees and legal fees if they place a legal charge on the asset used as collateral. If the valuation reveals less than what the business expected, it may impact the application approval.

It is thus advisable to re-check the asset you put up as collateral. Conduct a thorough valuation and take the expert’s assistance in knowing the actual value. It will help prevent your money and credit score.

Bottom line

Thus, secured loans are ideal for businesses with good credit ratings, operating history and revenue. You may apply for it to get a higher sum for a longer repayment tenure. It grants flexibility to meet other business requirements without worrying about heavy monthly instalments like unsecured loans.  However, beware to pay the dues timely or you may lose your assets to the provider.

Roscoe Tanner is the Editor-in-Chief, leading a large team of writers at LoansForever. He has expertise in writing for various borrowing options like personal loans, long-term and short-term loans, unemployed loans and many more. Roscoe joined LoansForever in 2015 but previously worked with many reputed loan companies. He performs the major role as the editor, covering key aspects of loans and finance. Roscoe Tanner wants to serve at large in the progress of the company and to present a modern alternative to the traditional financial industry in the UK. He is a Certified Financial Planner and has a god-gift of connecting with people through his valuable suggestions and writings. His expertise as a writer and editor in the finance industry is based on his education qualification. Roscoe has done a Master of Business Administration (MBA) in Finance.

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